Just So You Guys Know...

Bondarb's picture
Rank: Neanderthal | 3,768

Mod Note (Andy): #TBT Throwback Thursday - this was originally posted in August 2007 and it's scary how accurate @Bondarb was in predicting what was to come next:

bondarb:

...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I used to post here fairly often but haven't been here in awhile and popped in to see what was going on. The first thing that jumps off the screen is that this board generally is somewhat delusional about how bad things are currently getting at major broker/dealers and banks. To qualify myself, I am a prop trader at a large, top-tier bank (and our group is having a great year so I'm not saying this b/c I am specifically in danger). Let me just educate you guys about what is actually going on, department by department...

Sales/Trading: The structured products that have provided fat margins for dealers have stopped trading. They are sitting on the balance sheets of banks marked at levels that do not reflect reality awaiting painful mark-downs. CDO, MBS, etc. "traders" are literally sitting around surfing the internet all day. Now that buy-side clients have seen how illiquid these products become in times of stress it is unlikely they will return for years if at all. The profitable business of structured products is in for a large contraction. The hedge funds that used to buy these products are going out of business at a rate of several per day as the underlying collateral for many of these products is rapidly becoming worthless. It is only a matter of time before banks make large cuts and realize massive losses. Some suspect that the losses banks like Bear, Lehman, Goldman, RBS, etc. will face may be in the billions just on mis-marked structured products.

Asset Management/Prop Trading/Hedge Funds, etc.: The vast majority of buy-side traders have never lived through a period of high volatility and therefore the vast majority of buy-siders were caught off guard by this spike in volatility. Young geniuses and former "masters of the universe" are proving to be nothing more then glorified volatility sellers. Rumors fly constantly about massive losses at bulge bracket banks like Lehman and Goldman and of course hedge fund blow-ups are an every day occurrence. The entire model of hedge funds that trade structured products is being called into question as investors now realize that managers basically can invent their P&L month to month for years at a time. Many people think that the number of hedge funds could easily be cut in half as the "hedge fund bubble" deflates.

Private Equity: The cost of financing just went from non-existent to impossibly high in a matter of weeks as the high yield debt market is totally shut down. Deals that were already agreed upon like TXU, First Data, etc. are being called into question, pushed back or revised. The stock market prices a 50% chance that they won't get done at all. Banks that used to provide bride financing for deals are now stuck with massive portfolios of leveraged loans that they cannot sell. They will not take this risk again for a long time, making deals much harder to do. One could argue that the PE bubble is just as big as the hedge fund bubble and this industry also could contract very quickly. Worse, the PE guys are very young and have no clue how bad things are on the sell-side and so they think nothing is wrong and the game will be back on once they get back from summer vacation.

Investment Banking/M&A: See PE. No M&A activity can happen with the debt markets seized up. When will debt markets return to normal? Estimates range from "whenever the Fed eases" to "the fall" to "not for a long, long time".

Prime Brokerage: See hedge funds. The P.B. business will contract in tandem with the hedge fund business. An added problem is that many prime brokerage units have massive exposure to some of their hedge fund clients that are rapidly dissolving. Rumors are rife about massive losses at large PB's like Bear and Goldman.

...More generally, I think you guys are about to enter a very tough job market. Analysts have yet to be fired but history says analysts get axed when things get like this. In '94 it is said that Goldman axed 85% of their analyst class. I think that along with much of Wall St. you guys don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

Comments (132)

Aug 16, 2007

Buy low sell high?

    • 1
Aug 16, 2007

Now why did you just do that? Issue an apocalypse like that? The nerve. Proprietary trader and all. Go get yourself a drink tonight. On me!

Ay ya yai.

Aug 16, 2007

Fuck it im going into law. 200k first year working 60 hour weeks

Aug 16, 2007
sleepyguyb:

Fuck it im going into law. 200k first year working 60 hour weeks

Not really sure where you think you're going to swing a job with that pay and those hours. All my friends working legal jobs work hours pretty similar to my own (80-100). We're all recent college grads and to get anywhere you'll have to put in some pretty long hours right out of college.

Aug 16, 2007

..securities law will no doubt be a growing field with all the lawsuits against defunct hedge funds, banks, and ratings agencies...

    • 2
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Aug 16, 2007

Hook me up with a trader gig, I'd perfer in MBS. thanks

Aug 16, 2007

is there a forum like this for BigLaw?

Aug 16, 2007

I'm not quite sure I understand this. A majority of experts think that the global economy is as strong as they've seen and that this is a correction. Corrections don't cause companies to fire people only to rehire them in months.

Aug 16, 2007

. . . That's why I work in P.I.P.E's

Aug 16, 2007

h4zin yes, http://www.autoadmit.com/main.php?forum_id=2
eletrikq, they must be in NYC sweatshops. NYC is a pretty easy market to get into compared to DC, LA, etc. NYC has the worst hours. LA/DC you lookin about 60 hours a week. btw wtf college grads working legal jobs? LOL at dumb fucks. go to law school, you dont be a shitty paralegal lol

Aug 17, 2007
sleepyguyb:

h4zin yes, http://www.autoadmit.com/main.php?forum_id=2

LOL, TITCR

WE both know it's 160k first year.

Aug 16, 2007

...a majority of experts live in a fantasy world right now. 6 months ago the majority of experts said the housing slowdown would be over by now and in fact it is still getting worse as housing data today confirmed. They also said that the subprime meltdown would have no contagion effects and now the debt markets are frozen for everybody but the best AAA-rated companies like J&J. I would argue that the majority of experts are usually wrong at turning points and this is no exception.

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Aug 16, 2007

Bondarb,

Are L/S, Risk Arb, Relative Value HFs going under too or is it mostly the structured products/HY funds in trouble ?

Aug 16, 2007

What are the companies with AAA rating? J&J, pfizer lost it recently, so did someone else just cant remember.

Aug 16, 2007
Bondarb:

Sales/Trading: The structured products that have provided fat margins for dealers have stopped trading. They are sitting on the balance sheets of banks marked at levels that do not reflect reality awaiting painful mark-downs. CDO, MBS, etc. "traders" are literally sitting around surfing the internet all day. Now that buy-side clients have seen how illiquid these products become in times of stress it is unlikely they will return for years if at all.

It's a flight to liquidity. Though I don't like Taleb that much, you might want to read his book "The Black Swan". Six sigma events like this happen every five years--it's a VaR error more than anything else. I think you're forgetting about LTCM--which was a similiar flight to liquidity. People come back... the reason these products are so iliquid is that we're all reaching for the same door. Plus, sell-side traders are making very fat pay checks... bid/ask is huge right now--the problem is that so much of their compensation is stock based, and the bank stocks are taking pain.

Bondarb:

Asset Management/Prop Trading/Hedge Funds, etc.: The vast majority of buy-side traders have never lived through a period of high volatility and therefore the vast majority of buy-siders were caught off guard by this spike in volatility. Young geniuses and former "masters of the universe" are proving to be nothing more then glorified volatiltiy sellers.

At some prop desks this might be true. LTCM was only 10 years ago. Also, a lot of the big losers are stat-arb funds. TheyaEU(tm)re not selling volaEU"concrete relationships have broken down here. A lot of the people who have lost money are viewing this as a large opportunity (at least thataEU(tm)s what they tell investors)aEU"AQR, Highbridge, Global Alpha, RenTec, at one point Sowood, etc.

Bondarb:

The entire model of hedge funds that trade structured products is being called into question as investors now realize that managers basically can invent their P&L month to month for years at a time.

It's not the hedge fund managers who are inventing P&L. All hedge funds mark to market--when there aren't agreed upon model drive valuations for securities, these marks can change based largely on sentiment (how do you have collateralized debt in the first place--you need to create a default adjusted spread, predicting default is what these guys are doing in the first place.) The people who actually determine these marks are banks, ie. prime brokerage.

Bondarb:

Many people think that the number of hedge funds could easily be cut in half as the "hedge fund bubble" deflates.

That's an exaggeration.

P.S: It's a great time to be a money manger, if you didn't already get fucked.

    • 1
Aug 16, 2007

Sorry I really dont know how to use quotes so the format of this is amatuer...

GKA said:
Six sigma events like this happen every five years--it's a VaR error more than anything else. I think you're forgetting about LTCM--which was a similiar flight to liquidity. People come back... the reason these products are so iliquid is that we're all reaching for the same door. Plus, sell-side traders are making very fat pay checks... bid/ask is huge right now--the problem is that so much of their compensation is stock based, and the bank stocks are taking pain.

I reply:
Some sell-side guys are making big checks....for eg market makers in CDX indices, but many areas are moribound. High yield debt, CDOs, CLOs, etc. are just not trading. Those guys definitely arent making big paychecks in fat their desks are deeply in red.

GKA Said:
TheyaEU(tm)re not selling volaEU"concrete relationships have broken down here. A lot of the people who have lost money are viewing this as a large opportunity (at least thataEU(tm)s what they tell investors)aEU"AQR, Highbridge, Global Alpha, RenTec, at one point Sowood, etc.

I reply:
Relationships breaking down=Vol picking up. Guys that assume mean reversion are de facto vol sellers. Concrete relationships always break down during events like this but it may take years before they return to normal. 1998 was easy but other panics have been much worse. LTCM was only one fund and the whole credit universe never stopped functioning like it has this week.

GKA Said:
It's not the hedge fund managers who are inventing P&L. All hedge funds mark to market--when there aren't agreed upon model drive valuations for securities, these marks can change based largely on sentiment (how do you have collateralized debt in the first place--you need to create a default adjusted spread, predicting default is what these guys are doing in the first place.) The people who actually determine these marks are banks, ie. prime brokerage.

I reply:
You are wrong on this one. I spent three years working for a hedge fund that trades structured products and the prime brokers know nothing. You get your mark either from some model a 25 year old created or you get a mark from a sell-side desk. Salesman generally will give you any mark you want (at least before recently). Just wait until the stories come out about managers getting huge incentive fees in Q2 and then declaring their books worthless a month later.

Many people think that the number of hedge funds could easily be cut in half as the "hedge fund bubble" deflates.
[/quote]
That's an exaggeration.

If the # of hedge funds increased 5-fold this decade why is a 50% decline unreasonable?

GKA Said:
P.S: It's a great time to be a money manger

---I agree but the industry is about to shrink.

    • 1
Jul 10, 2015

P.S: It's a great time to be a money manger, if you didn't already get fucked.

Aug 16, 2007

...it depends hedge fund to hedge fund. The problem with many hedge funds regardless of strategy is that they hold positions that become illiquid in times of trouble. For eg GS global alpha is just a L/S equity fund that happens to pick stox with quant models but when vol spiked and their models told them to exit positions they couldnt do it. The positions were just to big and the fund lost a third of its value just trying to take off risk into a crazy market. I would argue the problem is worse the more obscure the product. Global Macro funds that trade very liquid stuff like on-the-run treasuries, stock index futures, etc. are in better shape because they can be nimble and easily manage risk. RV funds have a tougher time because they often trade things like off-the-run bonds that are harder to get in and out of.

In terms of structured products, I think the entire business model is questionable. How can you pay a manager based on performance when month to month he can totally make up the value of his portfolio? When the dust settles people are going to be outraged to learn that managers cut themselves huge checks for Q2 and then declared their positions worthless and closed up shop in July or August. These funds wil likely disappear and not come back even when the market calms down.

    • 1
Aug 16, 2007

Lol the OP is scaring the sh!t of me...

Aug 16, 2007

Bondarb is right on the money, esp. regarding structured products. In very illiquid products (like bespoke tranches) there are MANY situations where both the sell-side bank and client both think they have a positive mark-to-market. Both sides report a windfall profit which is impossible since it's zero sum.

    • 1
Aug 16, 2007

it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

Barrons just had an article about Bear Stearns being a good target for acquisition by a larger bank.

http://online.barrons.com/article/SB11867945550469...

Aug 16, 2007

...one of the reasons the stock market rallied late today was a rumor that Bear was going to anounce that they were selling themselves (or a stake in their business) to CITIC which is a bank controlled by China. Bear definitely will become a target if the stock goes lower but i think the business is very much at risk as they have a huge mortgage origination and sales business, a huge prime brokerage business, and their balance sheet is loaded with debt. I can't really figure out how they are going to make money until all this clears up and obviousloy from my above posts I think that could be awhile!

    • 2
Aug 16, 2007

Very informative, thank you bondarb.

Aug 16, 2007

Bondarb,

How do you see things playing out a month or two from now ? The contratarian argument is that the underlying fundamentals are strong and this is just a correction, why do you not believe that ?

Aug 16, 2007
Seanc:

Bondarb,

How do you see things playing out a month or two from now ? The contratarian argument is that the underlying fundamentals are strong and this is just a correction, why do you not believe that ?

I think that in three months economic growth will have slowed substantially and the consensous view will be that we are headed for recession. I could write all night about why but the bottom line is that I think we are seeing a huge credit bubble deflate and when credit contracts rapidly it almost always ends in a reccession.

    • 3
Aug 16, 2007
Bondarb:

Private Equity: The cost of financing just went from non-existent to impossibly high in a matter of weeks as the high yield debt market is totally shut down. Deals that were already agreed upon like TXU, First Data, etc. are being called into question, pushed back or revised. The stock market prices a 50% chance that they won't get done at all. Banks that used to provide bride financing for deals are now stuck with massive portfolios of leveraged loans that they cannott sell. They will not take this risk again for a long time, making deals much harder to do. One could argue that the PE bubble is just as big as the hedge fund bubble and this industry also could contract very quickly. Worse, the PE guys are very young and have no clue how bad things are on the sell-side and so they think nothing is wrong and the game will be back on once they get back from summer vacation.

Very interesting to hear your perspective, which is clearly a well informed one. Not sure it is fair to say though that PE fails to grasp the magnitude of what's happening in the debt markets. Its true, just about every hedge fund I've spoken with regarding junior forms of financing has sworn up and down that the evaporation of liquidity in secondary HY markets will dissipate in short order; however, I believe the vast majority of us in PE know to take these statements for what they are given the source of, and context for, such statements.

I do not believe at this point that the cost of financing has become impossibly high. Thus far, I'm seeing total senior and mezz leverage each getting priced up by 150 to 200 bps - don't get me wrong, this is pricey, but not prohibitively so. I think the real problem will come if we don't see some rationalization in the HY debt markets, since a reduction in leverage levels hits PE returns with much more force than increased pricing on said leverage.

Aug 16, 2007
smuguy97:
Bondarb:

Private Equity: The cost of financing just went from non-existent to impossibly high in a matter of weeks as the high yield debt market is totally shut down. Deals that were already agreed upon like TXU, First Data, etc. are being called into question, pushed back or revised. The stock market prices a 50% chance that they won't get done at all. Banks that used to provide bride financing for deals are now stuck with massive portfolios of leveraged loans that they cannott sell. They will not take this risk again for a long time, making deals much harder to do. One could argue that the PE bubble is just as big as the hedge fund bubble and this industry also could contract very quickly. Worse, the PE guys are very young and have no clue how bad things are on the sell-side and so they think nothing is wrong and the game will be back on once they get back from summer vacation.

Very interesting to hear your perspective, which is clearly a well informed one. Not sure it is fair to say though that PE fails to grasp the magnitude of what's happening in the debt markets. Its true, just about every hedge fund I've spoken with regarding junior forms of financing has sworn up and down that the evaporation of liquidity in secondary HY markets will dissipate in short order; however, I believe the vast majority of us in PE know to take these statements for what they are given the source of, and context for, such statements.

I do not believe at this point that the cost of financing has become impossibly high. Thus far, I'm seeing total senior and mezz leverage each getting priced up by 150 to 200 bps - don't get me wrong, this is pricey, but not prohibitively so. I think the real problem will come if we don't see some rationalization in the HY debt markets, since a reduction in leverage levels hits PE returns with much more force than increased pricing on said leverage.

...you might be right, I know less about PE then any of the other stuff I commented on in my OP. However, I do think I am right in saying that alot of banks have their balance sheets jammed with debt that they foolishly took on in order to get PE business. Until they sell these loans, which are "cove-light" type grabage, they arent going to be wanting to get involved in the PE business. My personal opinion is that this debt is going to take a long time to sell and it will go at prices much lower then where banks currently have it marked. To me, that means that the PE business is basically out of luck until the general credit problems get cleared up.

    • 2
Aug 17, 2007

Excellent and very informative post Bondarb.

Aug 17, 2007

My personal opinion is that this debt is going to take a long time to sell and it will go at prices much lower then where banks currently have it marked. To me, that means that the PE business is basically out of luck until the general credit problems get cleared up.

The correction (or meltdown) is really coming from the capital markets. That will most severely impact the "mega" (TXU, Chrysler, etc.) deals since no i-banks will be comfortable with the syndication risk. However, during this LBO craze, a good deal of PE buyouts have been middle market deals, and often times, middle market lenders hold these on their own books. Granted, leverage levels will be lower, pricing will be more risk-appropriate, and there will be no cov-lite deals, but deals can still get done, provided PE firms are willing to put up more of their own capital.

Aug 17, 2007
ebrunner:
bondarb:

My personal opinion is that this debt is going to take a long time to sell and it will go at prices much lower then where banks currently have it marked. To me, that means that the PE business is basically out of luck until the general credit problems get cleared up.

The correction (or meltdown) is really coming from the capital markets. That will most severely impact the "mega" (TXU, Chrysler, etc.) deals since no i-banks will be comfortable with the syndication risk. However, during this LBO craze, a good deal of PE buyouts have been middle market deals, and often times, middle market lenders hold these on their own books. Granted, leverage levels will be lower, pricing will be more risk-appropriate, and there will be no cov-lite deals, but deals can still get done, provided PE firms are willing to put up more of their own capital.

Agree with your point ebrunner. I don't think the middle markets will be hit with the same force as larger markets, where massive blocks of HY securities have created a glut of supply-side capital overhang. However, from the limited exposure I do have to the PE middle market, I've seen an eerily similar dislocation between supply and demand for debt capital.

I recently provided assistance on two MM-size add-ons for one of our portfolio companies. Apparently, for publicly traded lenders in the MM there is very little, if any, push to provide HY financing right now. Even if the lenders have no intention of syndicating these loans, their hands are tied, since any debt issued must be marked to market at the close of each fiscal quarter. Clearly, any losses generated by marking to market would reflect liquidity issues, and not true credit ones. Still, these losses seem very real from Wall StreetaEU(tm)s perspective, as they do inflict damage to the P&L.

Aug 17, 2007

Can you say permabear? :P...Jk...good post bondarb

Aug 17, 2007

...I am not a perma-bear at all. I have been bullish on the economy basically since I graduated from college but when the facts change I try to change with them which is what a good trader is supposed to do. If the price action proves me wrong I'll change my mind again but until then I think I am on pretty good ground in saying that historically credit crunches lead to bad economic outcomes.

    • 1
Aug 17, 2007

So, within IBD what are the safest groups to be in at the moment? An industry group perhaps, like energy?

Aug 17, 2007

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

Aug 17, 2007
Warhawk_1:

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

My understanding:
These deals are still set to go through. The terms were structured such that the banks still had/have to provide the financing, even though the debt didn't go to market to pay back the bridge loans. That's why they are shit-out-o-luck with the debt on their books.

Aug 17, 2007
ConcealedCarry:
Warhawk_1:

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

My understanding:
These deals are still set to go through. The terms were structured such that the banks still had/have to provide the financing, even though the debt didn't go to market to pay back the bridge loans. That's why they are shit-out-o-luck with the debt on their books.

This does, however, assume that the banks have closed on a transaction - and not merely signed a definitive purchase agreement. Apparently, many of the lead underwriters have walked after signing an SPA in recent weeks. No idea how they're getting away with this (since only a retarded investment banker would allow market MACs in a PA right now), but apparently a number of banks (including JPM) have walked away post-SPA, but pre-close, suggesting to those involved on the deals that they should feel free to sue the bank if they really want to contest the decision.

Aug 17, 2007
Warhawk_1:

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

What exactly do you mean that mezz spreads "widened to" 650-800 bps? Widened relative to what?

Mezz is a fixed rate security (generally at 11-13% cash, 2% PIK), it does not price in terms of spreads over LIBOR, like a second lien debt would.

Aug 17, 2007
smuguy97:
Warhawk_1:

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

What exactly do you mean that mezz spreads "widened to" 650-800 bps? Widened relative to what?

Mezz is a fixed rate security (generally at 11-13% cash, 2% PIK), it does not price in terms of spreads over LIBOR, like a second lien debt would.

Yes it does. Mezz is always expressed in terms of EURIBOR or LIBOR + a percentage. There is no way anyone is getting 11 or 13% for mezz, that's what PIK is at these days. Try 8-9/9.5%. It is split between cash pay and pik.

Aug 17, 2007

...my understanding is also that on mega-deals the banks are stuck. Often the deals have an option to terminate at a signifigant fee but that option is held by either the company that was acquired or the PE shop, never the bank. The banks made all sorts of ridiculous gaurantees in order to get business from PE shops at the height of the frenzy and are now left holding the bag. Some have speculated that PE shops might kill deals out of some sense of altruism or to prevent a large bank collapse that would endanger markets generally but to me that sounds like really wishful thinking. Bottom line is that banks will have to write down these loans at large losses if they don't sell them soon. However, unlike many CDO's on bank books these loans do have some intrinsic value and so eventually they should get sold at some price. To put it in Nasdaq bubble terms the leveraged loans are like Amazon.com whereas the subprime CDO's are like Pets.com. At some point the leveraged loans will become good buys for savvy bottom-pickers, but that could be a ways down the road...

    • 1
Aug 17, 2007
Bondarb:

...my understanding is also that on mega-deals the banks are stuck. Often the deals have an option to terminate at a signifigant fee but that option is held by either the company that was acquired or the PE shop, never the bank. The banks made all sorts of ridiculous gaurantees in order to get business from PE shops at the height of the frenzy and are now left holding the bag. Some have speculated that PE shops might kill deals out of some sense of altruism or to prevent a large bank collapse that would endanger markets generally but to me that sounds like really wishful thinking. Bottom line is that banks will have to write down these loans at large losses if they don't sell them soon. However, unlike many CDO's on bank books these loans do have some intrinsic value and so eventually they should get sold at some price. To put it in Nasdaq bubble terms the leveraged loans are like Amazon.com whereas the subprime CDO's are like Pets.com. At some point the leveraged loans will become good buys for savvy bottom-pickers, but that could be a ways down the road...

In theory, the banks are stuck since almost no one would grant them a Market MAC out. However, just about any bank can get a side-car provision that is pari passu with the diligence out PE buyers hold. ItaEU(tm)s basically nothing more than a shell game - the lenders effectively hold the same diligence MAC (though not a market MAC) as PE buyers do. As a result, the banks can simply cite that their choice to drop financing was driven by a business diligence issue (usually customer calls serve as the easiest scapegoat) and not by a deterioration in the capital markets. The only real option around this is for investment banks to greatly reduce the time gap between signing an SPA and closing on one. A year ago, this period could last at least 30 days (since an HSR filing is required for anti-trust, and this takes about 30 days to clear the FTC). However, many bankers are pushing some fucking ridiculous timelines to close right now -- e.g., a banker told me this evening that he wanted us to cut our post-LOI diligence from 5 weeks to 4 days - in response, I couldn't help it and started laughing out loud. Really glad I'm not running an auction right now...

Aug 17, 2007

Not sure I agree with this recession comment. Ultimately, right now it is fear of the unknown that is creating ultimate panic alongside a much needed correction. To suggest we will have a recession when prime lending is still viable and there is still tremendous global growth providing greater leverage to sub-prime exposure. The race to liquidity seems relevant right now, people are just fearful b/c we're unaware of what exactly is going on. Structured and high yield products could be in trouble, but yet High Yield is actually TAKING on people right now.

Aug 17, 2007

This is of course, only for deals in the relatively slim time window between signing and closing.

Aug 17, 2007

don't worry... a couple of month and the party starts again...

Aug 17, 2007

I've learned more in this single thread than I have from the aggregation of all the other threads on this forum.

Aug 17, 2007

What's your take on DCM banks like Barclays ?

Aug 17, 2007

Leveraged loan bank debt is currently being scooped up by the same PE firms that forced the banks to commit to these loans. For example, TPG Axon scooped up KKR/Dollar General debt on the cheap at 87 cents on the dollar, set to fetch TPG Axon IRR in the 18% range. So even though equity sponsors may have troubles meeting their 30-40% IRR's on the equity portion, they could very well make healthy returns on the distressed debt side, especially for deals in which they were outbid.

If one LBO portfolio company blows up, or becomes insolvent, all LBO related secured debt would be sold on the cheap, and the distressed funds within PE firms and hedge funds would come out as winners.

Either way the large secured lenders would get smashed by their very own PE clients..ouch!

Aug 17, 2007
Bondarb:

Private Equity: The cost of financing just went from non-existent to impossibly high in a matter of weeks as the high yield debt market is totally shut down. Deals that were already agreed upon like TXU, First Data, etc. are being called into question, pushed back or revised. The stock market prices a 50% chance that they won't get done at all. Banks that used to provide bride financing for deals are now stuck with massive portfolios of leveraged loans that they cannott sell. They will not take this risk again for a long time, making deals much harder to do. One could argue that the PE bubble is just as big as the hedge fund bubble and this industry also could contract very quickly. Worse, the PE guys are very young and have no clue how bad things are on the sell-side and so they think nothing is wrong and the game will be back on once they get back from summer vacation

Leveraged loan bank debt is currently being scooped up by the same PE firms that forced the banks to commit to these loans. For example, TPG Axon scooped up KKR/Dollar General debt on the cheap at 87 cents on the dollar, set to fetch TPG Axon IRR in the 18% range. So even though equity sponsors may have troubles meeting their 30-40% IRR's on the equity portion, they could very well make healthy returns on the distressed debt side, especially for deals in which they were outbid.

If one LBO portfolio company blows up, or becomes insolvent, all LBO related secured debt would be sold on the cheap, and distressed funds within PE firms and hedge funds would come out as winners.

Either way the large secured lenders would get smashed by their very own PE clients..ouch!

Aug 18, 2007
thadonmega:

Leveraged loan bank debt is currently being scooped up by the same PE firms that forced the banks to commit to these loans. For example, TPG Axon scooped up KKR/Dollar General debt on the cheap at 87 cents on the dollar, set to fetch TPG Axon IRR in the 18% range. So even though equity sponsors may have troubles meeting their 30-40% IRR's on the equity portion, they could very well make healthy returns on the distressed debt side, especially for deals in which they were outbid.

If one LBO portfolio company blows up, or becomes insolvent, all LBO related secured debt would be sold on the cheap, and the distressed funds within PE firms and hedge funds would come out as winners.

Either way the large secured lenders would get smashed by their very own PE clients..ouch!

Very true. I know in the past Apollo has practically become a distrssed debt fund in bad markets.

Aug 17, 2007
Bondarb:

Sales/Trading: The structured products that have provided fat margins for dealers have stopped trading. They are sitting on the balance sheets of banks marked at levels that do not reflect reality awaiting painful mark-downs. CDO, MBS, etc. "traders" are literally sitting around surfing the internet all day. Now that buy-side clients have seen how illiquid these products become in times of stress it is unlikely they will return for years if at all. The profitable business of structured products is in for a large contraction. The hedge funds that used to buy these products are going out of business at a rate of several per day as the underlying collateral for many of these products is rapidly becoming worthless. It is only a matter of time before banks make large cuts and realize massive losses. Some suspect that the losses banks like Bear, Lehman, Goldman, RBS, etc. will face may be in the billions just on mis-marked structured products.

Bondarb, lighten up, the fed discount window is now accepting illiquid structured paper..

" ...The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets .." Fed Statement 8/17/2007

But just to enlighten the board ..

The discount rate program is a repurchase "repo" program where the commercial banks and other financial institutions in distress exchange their distressed securities, as collateral, (MBS, CDO's, etc.) in exchange for cash, which in effect becomes a loan. So in effect it's a sale and repurchase agreement where the Fed lends cash (Repo buyer, cash issuer) to the distressed institution (repo seller, cash recepient), to help with liquidity issues surrounding their structured products, thus bolstering the solvency of large financial institutions with broad exposure to sub-prime related structured products (GS/BS/LEH,etc.).

It's more like a semi bail-out, because although the distressed entity receives cash for its worthless paper, it still has to repurchase the collateral at a later date. The maturity of the Fed loans hasn't been disclosed, but I believe the rate on the loans are 50 basis points over the fed funds target rate.

Bottomline: In the interim it'll help the brokers and lenders, but since it's a repo, they still have to buy back their junk at a much later date when they are in a much better position to do so, so in essence, a semi-bailout, and structured products trading desks may just be fine after all.

    • 1
Aug 17, 2007

Not to make a big deal out of LIBOR, but Medimedia's LBO from Dunn & Bradstreet (91, 92' or so) had MZ loans set at 3.25% + LIBOR with an equity kicker -warrant call option on 15% of outstanding diluted shares. Back then PIK wasn't too well received as forms of interest payments..So yes I've seen MZ loans that use LIBOR as risk free rates..

Aug 17, 2007

I'm finishing up an internship where we see a fair amount of mezz deals pass through and typically what we see is LIBOR+spread though there are some with a fixed rate

Aug 17, 2007
ToBankOrNotToBank:

I'm finishing up an internship where we see a fair amount of mezz deals pass through and typically what we see is LIBOR+spread though there are some with a fixed rate

Fair point - I'm guessing the fact that I've seen nearly all fixed rate mezz is more a funding preference from partners at our fund. I suppose the impact of fixed vs. floating is minimal, since I would presume any floating mezz would carry similar requirements to other LIBOR+ securities, which would require that ~50% of the floating risk be hedged.

Aug 22, 2007

This is the first time that I have popped back on to the forum in a while, and I would like to thank all of you who posted informative comments. That is why I came to the site in the first place.
Thanks!!!

Aug 17, 2007

First let me correct myself...we haven't really seen many deals at all pass through the last two weeks for easily guessed reasons...
And yes, the floating risk is required to be hedged, again for relatively obvious reasons

Aug 17, 2007

and we've stopped pitching LBO deals... makes the pitchbooks a bit lighter

Aug 18, 2007

..The cut of the discount rate was important just for the signal it sends about the Fed. Prior to that the last we heard was from Poole who had basically said the Fed was going to sit tight until September meeting no matter what. The actual mechanics of the move were somewhat cosmetic...3 month Libor is at 5.50 and the funds rate has been steadily around the target of 5.25 for the last couple of days so it is doubtful many banks will use the discount window at 5.75. But we now know that the fed is involved and that could support the stock market for the time being. However, this has done nothing to change the leveraged loan problem, the CDO/mortgage problem, or any issues with the underlying economy. I think we may see a period of calm but once the headlines start streaming again about bank problems, hedge fund blow-ups, CDOs, etc. the Fed will be back in moving the target rate very son.

    • 1
Aug 18, 2007

I'm not sure if I agree with the fact that S&T traders for MBS/Structured Products are sitting around surfing the internet all day.

Sure there are obvious liquidity issues for CFC, but I don't think that affects agency and other private-label CMO's, Whole Loans, REMICs, etc.

Aug 18, 2007
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

    • 2
Sep 1, 2007
madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

Lehman is hurting. Big time.

Sep 15, 2008
madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

O_O

May 16, 2011
madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

Just wanted to bump this post, after reading through the S&T forums a bit this is one of the better ones I've found.

Thanks Bondarb. (and sorry to the rest of you for digging up an old one)

Dec 14, 2011

Good read.

Dec 18, 2011

This is crazy. Really gives you a good look into the past.

madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

A good reminder that we don't always know as much as we think we do, and anything can happen at anytime. To all you working in the industry right now, godspeed.

Great post by Bondarb, he was spot on with basically everything he said.

I didn't say it was your fault, I said I was blaming you.

Sep 7, 2012
madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

I just wanted to requote this! :)

    • 1
Sep 7, 2012

Spot on. Predicted the future

madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

Ooops.

Sep 7, 2012
madgames:
Bondarb:

don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

Nice try. Its incredible he called it in August. Good post

Jul 9, 2015
madgames:

Bondarb: don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.

I don't see Lehman or Bear going out of business anytime soon. You are mistaken there.

Just lol.

Still can't believe Bondarb's call on this. Here we are, 8 years later.

Jun 9, 2017

lolz

Aug 19, 2007

Whatever, you'll have a couple of Distressed debt PE winners, but you'll have a thousand losers and the losers will outstrip the winners. Other it would be preferential to have more bankruptcies.

Aug 22, 2007

and i have to agree with bondarb. as a prop trader as well, i've also come to similar conclusions. it seems the dust has settled somewhat since bailouts have been pouring in all over the world, day after day. i guess the vol sellers win in the end, pity.

Aug 23, 2007

Roubini's blog:
http://www.rgemonitor.com/blog/roubini
insolvency problems will spice up liquidity issue...

Aug 29, 2007

LIBOR / EURIBOR + x%. The x% is split between a cash pay element and a PIK element so that your total return is LIBOR / EURIBOR + x%. Typically, these days, Mezz is being priced at EURIBOR + say 4.5% Cash Pay (meaning you get paid cash on the money you loan) and 5.0% PIK (meaning your investment accrues additional interest while you don't get paid cash). PIK as an instrument is fairly dead for now, it is, as it say, Paid In Kind, you lend money on top of EURIBOR or LIBOR and get paid a fixed percentage. More and more we are seeing OID's and other forms of fees these days. In an LBO, everything is priced at EURIBOR / LIBOR + x%.

Aug 29, 2007

and look at the Dow on 1/1/1987-12/1/1987 and 1/1/2007-today
and tell me that historical trends are bullshit

Feb 12, 2008

wow, looking back on this, you were pretty dead on re: the writedowns.

Apr 10, 2008

Anybody know how much Swenson, Birnbaum and Sparks got paid in the end last year? The reported $5-15m each now looks derisory.
I hope Bondarb was able to monetise his prophecies too.

Sep 15, 2008

wow....

Sep 15, 2008

Wow if you ever start a hedge fund let me know I'll be one of your first investors.

Sep 15, 2008

lol, people were talking about bear and lehman going bust well before bondarb posted here. just watch some jim rogers videos.

Jan 5, 2009

nostradamus what?

Apr 29, 2010

this OP certainly had a good read on the pulse of the market to say the least

May 17, 2011

wow - nice find in there.... pretty funny, actually.

May 17, 2011

Holy shit. Didn't notice the date, started reading, looked at the date, got to the bottom, was amazed.

Nostra-fucking-damus.

Dec 14, 2011

Excellent read. Props to Bondarb. I wonder what he's up to these days if he was a prop trader.

My name is Nicky, but you can call me Dre.

Dec 14, 2011

No kidding, thank God this wasn't a current post. I didn't look at the date.

Back to finals.

Dec 18, 2011
FusRoDah:

No kidding, thank God this wasn't a current post. I didn't look at the date.

Back to finals.

Haha, was thinking the same thing. Read the beginning and was like wtf until I saw Lehman being thrown around

Dec 17, 2011

Great post, I remember reading this right when subprime talk was first getting big. Bondarb still posts here, he's at a global macro hedge fund.

Dec 18, 2011

Bondarb, your analysis of the situation was nothing short of phenomenal.

Jan 26, 2012

Oh snap! Found this post randomly, read it and thought "a little too late" - only to look at the date it was posted. Wowzers!

Jan 26, 2012

holy shit that was a good call. nice work Bondarb.

Jan 26, 2012

Sounds about right to me. Most hedge funds performed miserably last year. Perhaps that is why the Fed is maintaining ZIRP until 2014 (insane, imo).

Jan 29, 2012

thanks for the info dude

    • 2
Sep 7, 2012

Oh what I would give to be a 21 year old in Manhattan - with an internship on a trading floor and a ringside seat to the destruction.
oh wait i WAS. and it SUCKED. Ever known roughly 4 weeks into your internship that no matter what you do , there's most likely no full time offer

Sep 7, 2012

Dude Bondarb (I'm assuming you're a dude) , if you'd started some small fund and made a bet on that , you would have Paulsoned that shit.

Sep 7, 2012

Wow. BondArb for president.

Sep 7, 2012

...man its hard to believe this post was five years ago...well im still in there swinging and a part of me is nostalgic for the chaos that was late 2007-early 2009. And no I wasnt particularly smart in realizing this, there were many many people who knew this story very very well....unfortunatelty many of the ones who knew it best never made any money on it b/c they lost their jobs waiting for it to occur in 2006-early 2007.

    • 3
Sep 8, 2012
Bondarb:

...man its hard to believe this post was five years ago...well im still in there swinging and a part of me is nostalgic for the chaos that was late 2007-early 2009. And no I wasnt particularly smart in realizing this, there were many many people who knew this story very very well....unfortunatelty many of the ones who knew it best never made any money on it b/c they lost their jobs waiting for it to occur in 2006-early 2007.

You are the man. Nicely called.

    • 1
Sep 8, 2012

Fantastic post. I wish we had more like this. What's your view, now, Bondarb?

Sep 26, 2012

Bondarb - Nice work. I was just starting work at a first-year and clearly was speaking outside of my knowledge. Bow down!

    • 1
Mar 6, 2014

Wow, this was dead on.

@"Bondarb", where do you do you think we are in the recovery of finance? Could you do another post?

Mar 6, 2014

@Bondarb pls.

    • 1
Mar 6, 2014

OP deserves some sort of trophy or medal.. unreal.

Mar 6, 2014

GODarb

Mar 6, 2014

~rip~

Mar 6, 2014

"Investment Banking/M&A: See PE. No M&A activity can happen with the debt markets seized up. When will debt markets return to normal? Estimates range from "whenever the Fed eases" to "the fall" to "not for a long, long time"."

And eased the Fed did, repeatedly and at an unprecedented scale too via QE and massive expansion of the Fed balance sheet. It is remarkable how in their zeal to get the market/economy going again t all these new bubbles just popped up in no time.

WSJ just came out with an article saying that American household wealth is at record high thanks to booming stock market and recovery housing market--in some subregions especially gateway cities like NYC and SF RE prices have already well exceeded record high.

So what will happen to all these new bubbles once the Fed begins to meaningfully reduce its pace of easing (eventually at some point it will have to do it, right? right??)---never mind stopping easing--and never mind tightening/raising interest rates.

Mar 6, 2014

"it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990."

Holy shit.

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

Mar 6, 2014

SB this man.

    • 1
Mar 6, 2014

Poo this man

    • 4
Jun 17, 2014

!

    • 1
Mar 7, 2014

Absolutely one of the best threads on the site. Really great read.

"When you stop striving for perfection, you might as well be dead."

Mar 8, 2014

Are you a wizard?

Mar 8, 2014

Pretty spot on. I will bring this article to my club.

Best Response
Jul 2, 2015

Most of you are so young you don't realize how amazing this post actually is....truly a bold call that was nearly 100% correct. Given the degree of confidence presented, I'm sure a lot of money was made by OP. This post should have the highest SB count in the history of the site. Throw some bananas you cheap fucks.

Slow clap....

Bravo.

    • 10
Jul 2, 2015

Bondarb should have pulled a JPaulson. Of course he probably didn't have a few billion discretionary to short the mortgage market and have GS to set those up... I agree, in August of '07 to predict with that much accuracy is somewhat frightening. Even naming Bear and Lehman.

Wasn't there a somewhat junior guy who made a name for himself in the '87 crash who predicted it, got everyone he knew to put money into it and walked away with something like $17MM for himself (which in those days was a lot of money) and made his friends and family a butt load?

Jul 9, 2015
DickFuld:

Most of you are so young you don't realize how amazing this post actually is....truly a bold call that was nearly 100% correct. Given the degree of confidence presented, I'm sure a lot of money was made by OP. This post should have the highest SB count in the history of the site. Throw some bananas you cheap fucks.

Slow clap....

Bravo.

If you think that post is amazing, there's another forecaster who correctly predicted that in 1987, along with an even larger economic crash originating in the public sector that's supposed to occur in Q4 2015(which seems right on track to happen).

The part that's interesting to me(in both cases) is how many people thought the original forecaster was completely full of shit. Someone once told me that "The majority must always be wrong, because it is the majority that creates the trend". How true that statement is.

Jul 10, 2015

Care to wager ?

S&P above 2200, I win, you shave your nutsack with an aggressive razor.

Below 1850, I'll shave my nutsack.

Jul 2, 2015

He said somewhere that he didn't actually make any money off it...definitely deserved to though

Jul 9, 2015

I am still around and I never said I didn't make any money off of it. but of course in retrospect it all seems very easy and I should have made much more.

    • 1
Jul 9, 2015

@Bondarb , what 's your view on the global bond market? Do you think there's a global bond valuation bubble that should pop soon? Especially with regard to high yield, EM/Asia high yield?

Thanks!

Jul 9, 2015

Absolutely incredible call, what a great read too. If you're reading this for the first time do not skip Page 1.

Jul 9, 2015
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********"Babies don't cost money, they MAKE money." - Jerri Blank********

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